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Foreclosed properties aren't necessarily a steal

There's no question that the spike in foreclosures has put many people out of their homes. But for others, hope actually springs up alongside the "for sale."

That was the case for Blake Thompson, 23. He's a year out of college and works as an electrical engineer. When Thompson decided to buy his first house this past spring, he specifically wanted a foreclosed property. His plan was to do some rehabbing. It was as close as he could come to his real dream.

"I've always wanted to build my own house, and in the city there aren't that many places to build at an affordable rate," Thompson says. "So I figured I could buy a foreclosure at a reasonable rate and still have money left to do what I wanted, build it the way I want to see it."

Thompson put a bid in on a foreclosed property in St. Louis Park. Its assessed value was $260,000 but was listed at $175,000. That discount drew a lot of potential buyers.

“They were so tired of people coming in and giving him offers and not accepting, the bank thought it was the real estate agent's fault.”

Blake Thompson, buyer of a foreclosed home

"Three people had put in offers and ended up backing out. And it was so bad that when I went in to put in my first offer, they fired the first real estate agent. They were so tired of people coming in and giving him offers and not accepting, the bank thought it was the real estate agent's fault," he says.

Thompson's not sure what turned the other buyers off. Maybe it was the tacky mirrored wall in the living room, or the electrical work mandated by the city inspector. But Thompson knew how to do a lot of the work himself and saw the fixes as minor. He finally scored the house for $171,000 and considered it a steal.

Real estate experts say foreclosures can be a great fit for people like Thompson, a first time home buyer willing to put in a lot of work. But the fact that three buyers bailed before he came along speaks to the difficulty of selling a foreclosed home.

Standing outside a foreclosed property in St. Paul, he says these properties aren't for everyone. He steps inside the house and points out that, like many foreclosed homes, it lacks a stove and other appliances. Other houses may have problems with mold, or vandals may have stripped them of copper pipes and aluminum siding. There might be liens on a house due to previous maintenance that a buyer would likely have to pay off.

On the other hand, Propp says, if a house is in good condition it might be priced at less of a discount than buyers are hoping for. He says on average, a decent foreclosure property will sell for about 85 percent to 90 percent of the fair market value-- not the 70 percent some eager buyers expect. Propp says mortgage lenders typically don't want to unload their foreclosed properties for a song.

"They have a responsibility to their shareholders. And if they were giving away properties, first of all, they'll probably get fired. They have to show they actively tried to market the property, and do their best, this is what the market was willing to [pay]," Propp says.

Flat or declining home prices are also playing a role, and reducing the pool of potential buyers for foreclosed properties.

Steele ProppMPR Photo/Annie Baxter

Rick Sharga of RealtyTrac, an online real estate marketplace, says foreclosures can be a good fit for those who want to occupy or rent a property, but not for investors who want to quickly rehab and resell.

"For people who want to get into real estate as an investment, this is a dicey time to buy foreclosures," he says. "This is a really tough time to buy and flip a property."

Jason Cramer of the Twin Cities HomeVestors franchise agrees. That's the "We Buy Ugly Houses" company, which buys, rehabs, and sells homes. Cramer says it's hard for his company to pick up foreclosed properties at a price that covers the transaction and holding costs and allows for a profit.

"That becomes increasingly difficult, even for us, as professionals in the marketplace, when you have an unpredictable market value, decreasing market value, and the marketing times are lengthening," Cramer says.

Foreclosed propertyMPR Photo/Annie Baxter

All in all, real estate experts say a foreclosed home can be a good investment for someone who wants to hold onto a property for a few years--if they're willing to put in as much work as Blake Thompson, and his contractor father, who recently showed up at his place to help.

"Friday I got a call from my dad asking me what time I was coming home. I was planning to go to happy hour, but that didn't happen," he says.

Thompson estimates he's still got three months of work before he'll be finished rehabbing his new home.